Here is a look at more of Tuesday's top business stories:
Merrill Lynch says investors should go back-to-basics
NEW YORK, Jan. 14, (UPI) -- Strategists and economists at Merrill Lynch said individual investors in the United States are likely to best leverage securities market opportunities in 2003 by taking a back-to-basics, goal-oriented approach, that incorporates realistic expectations and recognizes the important role that yield plays in a moderate-return environment.
Richard Bernstein, Merrill Lynch's chief U.S. strategist and chief quantitative strategist, said "In addition, capital-preservation and wealth-building are likely to be more important for the long-term than hunting for transitory advantages or trying to catch a turn in the market.
Although the markets remains "speculative," there are a variety of equity and fixed-income themes which investors might consider as they seek to achieve their financial objectives in the current environment Bernstein said in a report.
Heading the equity themes is a focus on higher-quality issues, rather than paying lofty valuations on lower-quality, riskier stocks, Bernstein said. In addition, investors will need to consider the potential importance of dividend yield of the shares in their portfolio.
There are also five stock sectors that Merrill Lynch's strategists like in 2003, headed by consumer staples, he said.
While the consumer staples sector isn't homogeneous, and not all staples are stable, "investors expecting global growth to be positive, as we do," should probably prefer the multinational consumer staples to the food chains and drug stores, which have little or no global exposure, he said.
Although many investors consider consumer staples to be overvalued, the sector's relative valuation appears to be quite conservative within the context of the last 18 years and remains the most undervalued sector in Merrill Lynch's dividend discount model, Bernstein said.
Energy is another sector which "we think will benefit from inflows of capital ... as investors seek higher returns in a previously neglected area." Utilities, especially "the boring distributors with the safe dividend yields," continue to be the focus for Merrill Lynch in the overall sector.
Aerospace/defense is also a primary focus for 2003, since "we think the next few years will be about the Pentagon, publicly funded research and development, and public sector capital investment in defense, intelligence, security and associated fields," Bernstein said.
Lastly, he said, to focus on major pharmaceuticals.
"We think that the negative political rhetoric directed at the drug stocks during the mid-term elections in November 2002 will subside. However, it is likely to pick up for companies in the care-provider group as Congress deals with the issues of the budget deficit and Medicare," Bernstein said.
In the last 18 years, "there have been only two periods when the (major pharmaceutical) stocks were less expensive than they are today --during the Clinton administration's attempt to overhaul the healthcare industry, and during the technology bubble."
Examining the fixed income market, Martin Mauro, Merrill Lynch's fixed-income strategist, suggested investors should take credit risk selectively and back away from interest-rate risk, especially as the year progresses.
"Individual investors should focus on seeking coupon income rather than capital gains," Mauro said.
Income-oriented investors should focus on the income benefits of spread products, such as corporate bonds and preferreds, while total-return investors should emphasize the stronger credits within the corporate market, he said. Dividend tax relief would likely benefit perpetual preferred shares.
To take advantage of these possibilities, Mauro said the industries he favors for safety include banks, consumer products and pharmaceuticals. He also said he liked the earnings picture for oil and gas industries and selected utilities.
In addition, Mauro said although municipal securities may underperform treasuries this year, they have appeal for income-seeking investors in the high tax brackets.
The prospect that dividends on common stocks will receive favorable tax treatment should be only a mild negative for municipal securities. Mortgage-backed securities "look appealing" for total-return and income-seeking investors, he said. Income-seeking investors should emphasize premium priced issues to guard against extension risk, he said.
David Rosenberg, chief North American economist, said, "As investors consider their strategies, they should fold in a handful of key economic considerations.
"In sum, the overall economic picture argues for a cautious approach to the financial markets. The distinctively speculative tone of the markets is one we think isn't particularly healthy," Rosenberg said.
Overall, Rosenberg said, real gross domestic product is likely to advance 2.6 percent in the year, with a choppy quarterly pattern. Broadly, momentum is likely to be weaker in the first half and stronger in the second half, he said.
In addition, for the first time in three years, the corporate sector has the ability to embark on a renewed capital-expenditure cycle, but it might not have the incentive, because operating rates may be too low to start a sharp revival.
Simultaneously, the consumer sector seems to be heading for a prolonged period of balance-sheet adjustment, a rise in the savings rate, and subdued spending. In addition, the dollar seems to be weakening, Rosenberg said.
Finally, the threat of war is still a drag on the economy, at least in the first quarter, Rosenberg added.
Honeywell sells unit to BASF
MORRIS TOWNSHIP, N.J., Jan. 14 (UPI) -- Honeywell said it has signed definitive agreements with BASF for two transactions that are part of a planned restructuring of Honeywell's Specialty Materials business unit.
Under terms of the deals, Honeywell said it will sell its engineering plastics business to BASF and will acquire BASF's nylon fiber business.
Honeywell said it will receive $170 million in cash and all of BASF's nylon fiber business at closing. Honeywell will pay $80 million to BASF within one year of the transaction's close.
Honeywell said significant synergies will result from the integration of BASF's nylon fiber business with Honeywell's existing nylon business.
The company said it expects increased utilization of its Hopewell, Va., caprolactam manufacturing facility that will supply nylon feedstock to the combined business as well as its fiber and plastics customers. The company added that it will retain its nylon films business and all of its specialty chemicals operations.
The transactions are expected to close in the first half of 2003, subject to regulatory approval in several jurisdictions.
Nance Dicciani, president and chief executive officer of Honeywell Specialty Materials, said, "This transaction is a significant step in our plans to rationalize the business by improving its current financial performance and long-term growth prospects.
"The plastics transaction will allow us to exit a non-core compounding business. The nylon transaction represents a unique opportunity to create a fully integrated business with the scale and synergies to make it a more valuable asset with the flexibility to serve the needs of both fiber and plastics customers," Dicciani said.
In 2001, Honeywell's engineering plastics business had sales of about $350 million, while BASF's nylon fibers group sales were approximately $350 million for the same year. Sales for Honeywell's retained nylon business in 2001 totaled nearly $700 million.
